Tuesday August 10, 2004 - 09:44:23 GMT
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INVESTICA Ltd - www.investica.co.uk
Data unsettles Sterling
Yield considerations should still offer Sterling some support, but Sterling's overall tone does not look good at present and it is very dependent on high rates. The currency will also be vulnerable if there is a sustained downturn in equity markets. Sterling is likely to hit further resistance at 0.6650 against the Euro, possibly weakening to 0.6710. Sterling is likely to face tough resistance and selling pressure on any move above 1.85 against the US currency.
Sterling has not been able to push above 1.8450 against the dollar and retreated to 1.8390 in early Europe on Friday. Sterling also weakened to 0.6670 against the Euro and dipped further to 1.8360 after the weak UK data.
The UK data was not supportive with consumer prices falling more than expected in July, cutting the annual rate to 1.4% from 1.6%. The trade deficit also widened to GBP4.97bn in June from an upwardly revised GBP4.82bn in May. Ironically, the trade figures were hurt by a sharp decline in the oil surplus. The lower inflation rate will make it more difficult for the Bank of England to sanction a further near-term increase in interest rates.
High yields and strong oil prices should still minimise Sterling selling pressure. Sterling's performance, however, suggest that the underlying weaknesses and dependency on short-term capital inflows may be starting to have a negative impact.
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